Overseeing the growth of fintech without abandoning investor protection or stifling innovation is fast becoming one of the biggest challenges facing regulators. Now, regulators must look ahead to a future that promises artificial intelligence (AI) replacing humans and the dawn of fully automated robo-advice.

A new consultation paper from the B.C. Securities Commission (BCSC) examines the current and possible future state of fintech regulation.

During the past few years, regulators have found themselves faced increasingly with new business models, novel securities and innovative financing techniques. For the most part, regulators have tried to accommodate these developments within the existing regulatory framework.

For example, the Canadian Securities Administrators (CSA) treats registration rules as being “technology-neutral”: the same requirements that apply to traditional investment firms for collecting “know your client” (KYC) information or assessing suitability also apply to online services.

Now, though, regulators are beginning to grapple with the prospect of technological developments that may make this approach outdated.

The BCSC’s consultation paper, which is out for comment until April 3, contemplates the inevitability of increasing automation in the financial advisory business. The paper reports that online advisory firms anticipate a future in which they will be able to automate many tasks – including KYC collection, determining suitability and making investment recommendations – that people currently perform. For this to happen, regulations are going to have to change.

Under the CSA’s current approach, human intervention is required to confirm whether a recommendation that an algorithm generated is suitable. According to the BCSC’s paper, this reflects regulators’ belief that the advisory process requires human oversight and that regulators “can understand the decision-making path” of a person better than that of an algorithm. But this is changing.

The BCSC reports that AI- enabled apps are getting better at collecting, processing and analyzing data: “Developments in machine learning are improving the quality of decision-making by AI, and algorithms are being refined to help humans better comprehend the decision- making path AI takes.”

Once firms automate the basic investing process (KYC, suitability and investment recommendations) completely, human oversight of these activities “may provide little added value and only add to inefficiencies,” the BCSC’s paper states.

In anticipation of this situation, the BCSC is looking at how regulation should evolve. The regulator is seeking feedback on how oversight should be carried out in a world in which advanced AI is doing much of the work of the traditional retail investment process. And the BCSC’s paper calls for ideas for alternative investor protection mechanisms that can be relied upon within a fully automated advisory process, apart from simply restricting the investment products firms can offer.

In addition, the BCSC’s paper indicates that robo-advisors also want more guidance about outsourcing and referral arrangements between their businesses and traditional portfolio managers. The paper states that regulators need to consider whether to allow firms to utilize “regtech” solutions when outsourcing certain aspects of the KYC and suitability processes that currently must be conducted in-house.

Furthermore, the BCSC’s paper contemplates whether regulatory action is needed to deal with obstacles that are impeding the process of investors transferring assets and switching firms – including both regulatory requirements that may be slowing down the process and the industry’s administrative practices.

The BCSC’s paper also looks at the challenges facing the regulation of cryptocurrencies, initial coin offerings (ICOs) and investment funds that invest in these emerging asset classes.

The CSA issued a notice last year that sets out that regulator’s views on the status of ICOs and cryptocurrency-based investment funds. To date, the CSA has taken the position that ICOs must be assessed on a case-by-case basis to determine whether they constitute securities. This triggers registration and other requirements for offerings that involve securities.

The BCSC’s paper indicates that firms are looking for more guidance on whether a particular ICO will be considered a security. The paper solicits feedback on the criteria that regulators should use in making these judgments, and also contemplates different ICO models that could be utilized to avoid being classified as involving a distribution of securities.

As firms develop methods to invest in ICOs and cryptocurrencies, the BCSC paper also considers whether traditional proficiency requirements for fund managers – such as requiring knowledge of securities and conventional portfolio-management techniques – are relevant to portfolio managers who focus on digital assets. The paper suggests this traditional knowledge may not be as important as the understanding of “cryptoeconomics.”

Although the BCSC published the paper on its own, regulatory sources indicate that many of the same topics are being discussed at the CSA as part of its “regulatory sandbox.” The CSA is expected to publish additional guidance soon that will expand on its initial views on cryptocurrencies, ICOs and cryptocurrency-focused investment funds.